Ratcheting Up Standards: Multinational Firms in Global Environmental Governance

• In Event: Climate and Geopolitics in Global Value Chains

Abstract

Multinational corporations (MNCs) play a key role in global environmental governance, yet the precise nature of their influence on international environmental standards remains less understood. I explore the impact of MNC activity and the integration of MNCs in global value chains (GVCs) on countries' participation in international environmental agreements and environmental policy outcomes. Using data on MNCs' cross-border activity and environmental provisions in international agreements, I find that countries with higher levels of vertical cross-border investments and cross-border MNC activity are more likely to conclude international environmental agreements and to include environmental provisions in trade agreements. Conditional on participating in international environmental agreements or including environmental provisions in their trade agreements, such countries are also more likely to "converge up" - they include higher environmental standards in their international agreements. I argue that contrary to the conventional wisdom that MNCs benefit from divergent standards, which allow them to reduce operational costs by relocating their polluting operations to jurisdictions with lower standards, MNCs increasingly prefer "upward converging" standards, which simplify the compliance process and save administrative costs. I further show that two mechanisms, activist pressure and supply chain resilience, lead MNCs to prioritize reducing administrative costs when weighing the tradeoff. First, MNCs that are more prone to consumer pressure and activist scrutiny are more likely to lobby for upward converging standards, as they fear the potential backlash if they relocate their production to take advantage of diverging standards. Second, MNCs with longer contracts with their supply chain partners are more likely to prefer upward converging standards which help reduce uncertainty in their supply chain relations.

Author

• Grace Zeng, Princeton University